Would Weaker Targets Mean A Cheaper Climate Bill?

November 17, 2009

As Lisa Lerer reports in Politico today, one of the steepest hurdles looming over the Senate climate bill is the fact that there are a lot of coal-state Democrats out there who want to see major changes to the legislation before they'll vote for it. Last week, 14 senators wrote Harry Reid demanding more protections for coal-heavy utilities. And the industry wants to see the bill's near-term emission targets relaxed. Currently, the Senate cap-and-trade program aims to cut greenhouse-gas emissions 20 percent below 2005 levels by 2020. Senators like Max Baucus have asked for 14 percent or 17 percent.

But here's a question: Would weakening the near-term targets really make the climate bill any cheaper? That's certainly the rationale behind loosening the cap. A less stringent cap means that there are more tradable pollution permits out on the market. Higher supply means that the price of carbon pollution falls—and therefore dirty energy becomes slightly cheaper. So the coal industry argues that a weaker near-term cap would ease potential rate increases on consumers and make the transition less onerous. (True, it'd also mean more and more CO2 piling up in the atmosphere, but set that aside for now.)

Anyway, that's the theory. The reality, though, could be quite different. As Raymond Kopp, director of Resources for the Future's climate program, points out, weakening the short-term cap—while keeping the target for 2050 in place—might actually do very little to budge carbon prices. That's because polluters are allowed to "bank" permits and save them for the future—if, for instance, they expect that carbon reductions down the road will be even harder. (After all, a cap-and-trade program, by design, targets the easiest cuts first.) So if the 2020 target is weakened, and there are more permits floating around in the early years, polluters will just buy up more of them to bank for later. The carbon price will be more or less the same as it would be if polluters had to make cuts. Indeed, EPA and EIA analyses of the climate bill bear this out.

Now, Kopp's prediction might not pan out—the EPA analysis assumes that polluters will have perfect information about the future when deciding whether to bank permits, and in the real world many companies don't. Plus, many companies may be short-sighted and use the permits in the short term to pollute, even when they should be saving them for later, when cutting pollution will likely be more expensive. Still, it's not a sure thing that a weaker short-term cap will make the bill any cheaper.